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An investment can be considered in the stock of Gujarat Ambuja Cement, especially for any weakness linked to trends in the broad market. Its strategic partnership with Holcim of Switzerland is likely to be of a value-enhancing nature (refer to story on page 6). The stock trades at a price-earnings multiple of about 15 times its likely FY 05 earnings and 12 times its likely earnings for FY 06. The valuation levels offer potential for gains for investors with a one- to two-year perspective.

This recommendation does not factor in the scaling of revenues in the near term and of earnings over a longer period due to acquisitions, which are likely. As its stake in ACC has been placed beyond the pale of a hostile bid, Gujarat Ambuja can devote its balance sheet strength and financial savvy in raising equity and debt at attractive rates to bankroll acquisitions.

Gujarat Ambuja has reported an impressive earnings growth for the six-month period ended December 2004 aided by the combination of a healthy volume growth of about 15 per cent and higher price levels. In its focus markets in the Northern and Western regions, a finer balance between demand and supply is likely to provide greater stability for cement prices at higher levels. Gujarat Ambuja is likely to reap rich benefits from such a trend.

We have several `buy' recommendations outstanding on the stock at prices between Rs 140 and Rs 357 with the latest call in the first week of October 2004. We remain bullish on the stock, though going forward, gains may be of a more moderate nature. A spurt in input costs remains the principal risk to profitability and, by extension, to our recommendation.

Open offers have been announced by Ambuja Cement India and Holcim — this is an integral part of the Gujarat Ambuja-Holcim deal — for ACC and Ambuja Cement Eastern at Rs 370 and Rs 70 respectively. Shareholders of ACC and Ambuja Cement Eastern may retain their holdings. We would provide our view on the open offers when they open in March.

S.Vaidya Nathan

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